M2 money supply rose sharply, driving the stock market higher. Now it has peaked and rolled over. That does not bode well for the Bull market.

Our Chartist Friend from Pittsburgh kindly shared a chart of M2 money supply and the S&P 500 stock market index (SPX). The correlation between expansion of the money supply and the stock market is worth studying.

The primary point is that “real growth,” i.e. rising wages and profits powered by increases in productivity, does not require massive growth of M2.

Here is Chartist Friend from Pittsburgh's explanatory commentary:

"He who controls the money supply of a nation controls the nation." President James A. Garfield

Except during periods of exceptional earnings growth like we had during the pre-internet computer boom when companies like Microsoft, Oracle and Intel were improving business productivity by leaps and bounds, the trend of the stock market (and economic growth in general) tends to closely follow changes in Fed controlled money supply growth.

The outlier earnings growth of the 1980's and early 90's PC and database revolution was so strong that the Fed was able to take its foot off the monetary accelerator without causing a corresponding drop in stock prices. Once every business was fully computerized in the mid 90's the Fed floored it again to support stocks and create the Internet Bubble. Since then every time the Fed has taken its foot off the M2 accelerator the market trend has turned negative and the economy has gone into recession.

That appears to be what is happening right now.

Note the clear correlation of the 1987 crash and the breakdown from a 20-year dome-top of M2 growth that occurred during the late 80's. The two downtrend lines are parallel on the chart.

Thank you, Chartist Friend from Pittsburgh. As many observers have noted, you can expand the money supply but if that money ends up stashed as bank reserves, it never enters the real economy, nor does it flow into household earnings. The velocity of that "dead money" is near-zero.

M2 declined in the housing bubble as the velocity of money skyrocketed: everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc. The recipients of that spending also borrowed and spent as if the "free money" would never end.

If M2 expansion is the only thing propping up an artificial market, what happens to the stock market rally as M2 rolls over?

M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.

M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits

"Money supply," from what I understand of currencies, is supposed to be an indicative measure of the amount of money circulating and actually available for deposit/withdrawal in the physical. When it is tainted with credit, as ours is, it is no longer credible. I call horseshit on our "money supply."

How is it that people think that if the banking system fails, people will stop producing food? It is like without the banks we will curl up and die.

For tens of thousands of years we did not use fiat currency, nor did we have Central Banks, nor did we have banks. We traded in gold and silver, because it is money, and we did great. We had some great socities.

So when I go to trade you silver for a meal, and you say "No", I will find someone else. And besides, who says I want to trade you my silver for your food?

If the banking system fails, that would a crises. Could it be martial law carried out by brownshirted Homeland Security. In the president's most recent (Friday the ^th- July, states in a crises, The POTUS would controll the food supply and communications. Let that sink in.

silver and so forth are but ONE commodity used for barter. It isnt the only one, or even a universal one, same with gold. That is my point. You act as if it is some sort of universal currency, it is not.

When country is stable fiat is fine

when country is becoming unstable silver/gold are a decent hedge against future inflation

When the shit hits the fan bad, BARTER takes over. SOme may trade for silver/gold some may not. Suddenly seeds, food, bullets become more precious than some basically useless metal.

I would never ever ever sell a pound of gold for a pound of food. There has never been a period in history where valuation reached to that point. If you're worried about a complete collapse, then you should have already prepared and secured your food supplies...

Until the industrial revolution, money was simply a stored value of food. Ergo, that is why for the first 120,000 years of human existance before civilization, gold and silver ment very little. A pound of food is priceless when 1 out of 7 Americans waddles into Mall-Wort to use their SNAP benefits to buy a few days of food at a time. One supply chain disruption could starve a large part of America, as most people are terminally obese, and couldn't survive a phase where they have to walk, work, etc. I might not eat people, but I'll use blubber for lamp oil........

Well, there´s many times more debt than money and staggering amounts in insurance contracts where this system somehow insures its own sustainability. Meanwhile we´re in a long and rising wave of productivity increases and decreasing demand for labor. It´s difficult to see a benign end game in economies that are mostly dependent upon consumer spending.

Don't worry about them. They will be saved by the thousands of good union jobs generated by the recently passed High Speed Rail project. Everybody gets a chicken in the pot for rainbow stew. I fear ultimatly, the taxpayers in the flyover regions will be on the hook to bail them out.

No new money in a fiat/debt based system means debts go bad. Debts are what back the currency. Bad debts mean the currency becomes just little pieces of paper with no demand on them to pay debts any longer. It is more an argument for QE to get debt off banker books than anything else. The Fed will not be able to loan enough money to JPM to stop them from going under if their counterparties, who don't get fed loans, start going under. The situation will spiral fast. They were stupid to try and pretend the banks didn't need massive QE for this long. If they want to play teh paper debt money game, they need to stop pretending the money was ever intrinsicly worth anything.

"According to a memo from the London Organizing Committee of the Olympic Games, any fish and chips vendors at the Olympics who don't have golden arches will be disallowed from selling chips alone as reported by the Guardian. "

Yes, no fish and chips for you sucker. MickyD own the french fry world! You can't make this shit up.

what do we have? Well, our worst fears have been confirmed. It seems like the only important factor driving the stock market is monetary policy. I think if we suddenly remove easy money then we will see a huge market panic. Eventually, the market will adjust, and fundamentals will become the most important driver in the market.

What are the limits of monetary policy? When I was in school, we had one formula for figuring out the effects of money creation. Nobody bothered adjusting the formula for additional rounds of monetary policy.

That is the problem in a nutshell. We know that monetary policy is doing less and less, but we do not have enough information to show why this is happening and how it is happening...yet.

Since those HELOCS were bundled into Credit Backed Securities, all is well, right? Write off the debts of the homeowners no need to reposses their pools. No fuckin' CDS of any type seems to ever "trigger" anyway, banks will be fine, just go to the FED's discount window, use the newly separated HELOCS as collateral. No trail of ownership for the banks? No Problem! This is America....capitalism(?) for all(except J6P!?), baby! Introduce 4.5% auto loans for all! Result/ Chevy VOLTS for all! I may win a Nobel! Feeling a bit Patriotic here!

no idea, but I think market is going down because last time when we hit the top trend line and came down to too only a few days to get back to baseline. this time it's endless, everyone knows where we have to get to, so shy are the alog's taking so long, it's a joke.

at the rate we are going it will be july 18th before it happens!!! when we get to the trend. I don't know what happened the past week. but it's more fucked up than usual

it took two days to get to teh qual drop two weeks ago that it took 5 days to do so far as of yesterday